New York's fiscal risks

By - 8/31/2012

In his statement on New York's July cash report, state Comptroller Thomas DiNapoli got straight to the good news: Tax revenue last month was "close to expected levels" after falling short for two months.

Then came the not-so-good news: "New York's fiscal picture remains tied to the strength of the economic recovery," he said. "The economic outlook has deteriorated in recent months, and that is making New York's revenue outlook less certain."

According to the cash report, general fund personal income tax collections through July totaled $9.3 billion, down 1.6 percent from last year. "All funds" receipts-including money from the federal government-were $39.4 billion, down 7.9 percent. A big chunk of the decline reflects a nearly 21 percent drop in federal receipts-totaling $3.2 billion-largely due to lower stimulus spending.

The weak recovery is not the only threat to New York's fiscal health. A recent report from a task force headed by Richard Ravitch, a former lieutenant governor, and Paul Volcker, a former chairman of the Federal Reserve, details six major fiscal challenges on the horizon for New York and other states.

The risk factors include the rapid rise in Medicaid spending; narrow, eroding tax bases; underfunded pensions; and the challenge posed by local government fiscal stress. The most immediate threat, however, might be federal deficit reduction. No matter who is elected president in November, ending the string of trillion-dollar budget gaps will be near the top of the agenda in Washington.

As the report notes, states are likely to feel the impact in two ways. One is a cutback in grants under entitlement and discretionary programs. The other is a reduction in expenditures that support direct federal activities-from procurement to salaries-which would undermine state tax revenues.

Then there's the potential impact of federal tax reform. If, say, the deductibility of state and local taxes on federal returns were scaled back or eliminated, it could have a significant effect on many states-and New York more than most, because of its heavy state and local tax burden.

Under Gov. Andrew Cuomo, New York has made considerable strides in fiscal management. But much more work lies ahead.